DEO - Diageo falls after Morgan Stanley warns on weakness for U.S. business

2023-07-20 07:51:24 ET

Diageo plc ( NYSE: DEO ) traded lower on Thursday after Morgan Stanley started off coverage on the spirits stock with an Underweight rating.

Analyst Sarah Simon said that while industry spirits sales volume grew materially faster during the COVID-19 period, growth has now normalized and growth in the key U.S. market has converged with beer. The view from Simon is that dynamic means a potential period of underperformance for Diageo ( DEO ).

"Our EPS estimates are -9% below consensus for FY24. This reflects our view that the company will face weaker than expected sales in the US, reflecting inventory build up at multiple levels (consumer, retail and wholesaler)."

Looking ahead, Simon and team think it will take at least 12 months for the spirits business to normalize. "While the company could in theory cut marketing in order to limit earnings downgrades, this would likely result in slower run-down of the excess inventories that have built up," she warned.

Morgan Stanley assigned a price target of £30 to Diageo ( DEO ).

Shares of Diageo ( DEO ) fell 1.49% in London trading on Thursday afternoon. The spirits stock was down 1.98% in premarket trading in the U.S. Diageo ( DEO ) is expected to report earnings during the first week of August.

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